First of all, I do not think the SEC should allow soft dollar arrangements of any kind. By their very nature they will ultimately lead to inappropriate activity. If the means by which a firm pays for its analysts and researchers is brokerage commissions, the generation of commissions becomes the goal, not valuable research and analysis. If the SEC eliminated soft dollars, requiring people to pay for research and analysis with hard dollars, the goal of research and anaysis would be clear. If it is good it is compensated, if it is not it isn't. Soft dollar arrangements will always be "fuzzy" arrangements that allow money to fall through the cracks.

Moreover, because they are "fuzzy" the SEC has to spend time constantly rewriting the regulations to clarify what is permissible and what is not.

Of course, smart lawyers are always right behind, "guiding" clients through the maze. However, since the SEC is not eliminating soft dollars anything more restrictive is better.

I also want to broach a related topic that does not appear to be addressed by the proposed regs. At West Virginia we are prepared to pay for all services with hard dollars. With regard to commissions, we maintain commission rate targets that our money managers are supposed to meet. They are fairly aggressive, so our money managers tend to avoid soft dollar commission arrangements whenever possible. But, it is not always possible for them and, consequently, us. Essentially, some of our managers have to use "commission recapture" brokers because some of their other clients need this artificial mechanism to create a stream of revenue outside of their normal funding mechanism (for public funds the normal funding mechanism would usually be the legislative appropriation process). The excess commission is either used to pay for client's costs in some way or returned to the client. Of course, the commission recapture brokers take their cut of the commissions for this service, a service that really has nothing to do with the efficicacy of the actual trade. Because money managers are trading for many clients at once in blocks, West Virginia has to go along with this artifice or either leave money on the table or trade after everyone else and suffer on execution timing. The end result for us is that our commission costs are greater than they need be. I do not think this type of soft dollar arrangement is addressed by the proposed regs, but we think it is a bigger issue for us.

I also think that this soft dollar setup is driven by investment banking and those investors that benefit from the arrangements as described above. In our discussions with our money managers, it seems clear that they are not the ones perpetuating the practice except to the extent that "it has always been done that way" and there are individuals that benefit personally. It is hard for me to believe that it is a practice they could not live without.